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Refinancing boom, but little lift for economy

Borrowers savor low rates but tend to save, not spend

By Robert Gavin
Globe Staff / September 12, 2010

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Homeowners are flocking to refinance their mortgage loans at record low interest rates, but unlike past refinancing waves, few are using their homes like ATMs and cashing out to buy cars, take vacations, or remodel, according to mortgage bankers and economic statistics.

This newfound frugality represents a sea change in how Americans have viewed their homes in recent years, when rising values provided a ready source of borrowed money to support spending. Cash-out refinancings have plunged 90 percent since peaking in 2006, according to Freddie Mac, the government-owned mortgage company.

Instead, homeowners are taking advantage of 30-year mortgage rates in the low 4 percent range, and 15-year rates that are even lower, to reduce debt, increase savings, and strengthen household finances. Michael Lou, for example, recently refinanced his Quincy home, shaving a percentage point off the interest rate and slashing his monthly payment by more than $250.

And where is the extra money going? Into savings.

“We try to put money away because you never know what will happen ,’’ said Lou, 39, who owns the home with his partner. “At any moment, one of us could lose our job.’’

Lou’s experience helps illustrate why historically low interest rates have provided just a modest boost to the US economy, which depends on consumer spending for about 70 percent of activity. The last time interest rates fell toward record lows, in mid-2003, consumer spending surged at an annual rate of nearly 6 percent, according to the Commerce Department. This year, consumer spending has increased at a 2 percent rate.

Cautious spending and increased saving will reduce household debt, increase disposable income, and strengthen the US economy in the long term, analysts said, but for now, it means subdued consumption and weaker economic growth.

“Consumers won’t be paving the way for the recovery,’’ said Kenneth Rogoff, a Harvard University economics professor who has studied 800 years of financial crises and their aftermath. “We’re probably going through a long period where people are repairing their finances.’’

Lower mortgage rates, of course, are helping many families to improve their finances. Refinancing activity has jumped by more than 70 percent nationally since rates began their recent slide in June, according to the Mortgage Bankers Association, a Washington trade group. Many Massachusetts lenders say their business has doubled, tripled, or more because of the surge in refinancings.

Metro Credit Union of Chelsea, for example, has $82 million in mortgage applications — primarily refinancings — in the pipeline, up from $29 million in June and $13 million in January, said Robert Cashman, Metro’s chief executive.

John Battaglia, president of Cambridge Mortgage Group, a unit of South Shore Savings Bank of Weymouth, said mortgage applications — 65 percent refinancings — have more than quadrupled from a year ago.

Salem Five Mortgage Co., a unit of Salem Five Bank of Salem, estimates its applications have jumped at least five times since the beginning of the year.

In nearly all cases, homeowners are cutting payments, loan terms, or both, bankers said. Very few are taking cash.

“I see more people trying to pay off their debt, trying to get their financial situation in good order,’’ said Ed McDonald, president of Salem Five Mortgage. “This is probably the best time to look at the next 10 years of your life and see what you want to do with your mortgage.’’

David and Ina Steiner hope to pay it off. With 14 years left on their mortgage, the Natick couple recently refinanced from a 20- to a 15-year loan, cutting the rate by more than a point, and their monthly payments by $150. The Steiners, however, plan to keep paying the extra $150, which would allow them to pay off their home in just more than 10 years.

“It just doesn’t make sense to restructure one debt so you can start another,’’ said David Steiner, 51. “And if money ever got tight, it gives us flexibility’’ to pay the lower amount.

Mortgage rates have fallen recently because of the slowing US economy and fears that it could slip back into recession, analysts said. Those fears have pushed investors into safer assets, particularly US Treasury bills, to which mortgage rates are tied.

When Treasuries are in demand, their prices go up and interest rates go down. Since early June, when economic data weakened, the rate on the benchmark 10-year Treasury has fallen by about a half-point, and mortgages have followed.

The average for a 30-year fixed mortgage was about 4.3 percent last week, down from about 4.8 percent in the first week of June, according to Freddie Mac.

Frank Nothaft, chief economist at Freddie Mac, said mortgage rates may have hit bottom, with recent data suggesting the recovery is advancing, albeit slowly. But he forecasts that they will remain at or near record-lows for several weeks.

“There will be a gradual uptick as the economy improves,’’ said Nothaft, “but I don’t expect them to spike.’’

For homeowners hoping to refinance, expect a longer and more rigorous process than a few years ago, mortgage bankers said. The “no-doc’’ loans of the last housing boom are gone. Lenders are requiring strong credit histories, thorough property appraisals, and detailed financial documentation.

“Everything takes more time,’’ said Amy Tierce, branch manager at Fairway Independent Mortgage in Needham. “We’ve gone from an industry that never looked at a piece of paper to one that looks at them under a microscope.’’

Tougher requirements, meanwhile, are reducing the number of homeowners who can qualify for refinancing. Depressed home values are also leaving many homeowners with insufficient equity to refinance. As a result, refinancing activity nationwide is only about half of what it was in 2003, when mortgage rates fell to 45-year lows, according to the Mortgage Bankers Association.

But for those who can qualify, today’s even lower rates mean significant savings. Peter Valotto, a salesman for technology firm Cisco Systems Inc., estimates that he cut his monthly payments by 15 to 20 percent after recently refinancing homes in Beverly and Lincoln, N.H.

And if rates continue to fall, he said, he will refinance again. “If I can put more money in my pocket, instead of the bank’s,’’ he said, “that’s a good thing.’’

Robert Gavin can be reached at rgavin@globe.com.